De Economist

, Volume 160, Issue 4, pp 397–412

Portfolio Implications of Cointegration Between Labor Income and Dividends



This paper analyzes the implications of cointegration between labor income and dividends for the optimal portfolio weight for stocks. In a recent paper, Benzoni et al. (J Finance 62:2123–2167, 2007) claim that, as a result of cointegration, the optimal weight in stocks may be smaller for young investors than for older investors. This contradicts the traditional life-cycle models which typically imply portfolio weights that decrease with age. This paper shows that when stock returns are affected by other factors than dividend growth, for example due to time-varying discount rates, the portfolio implications of cointegration are much less severe. In a realistically calibrated model, the life-cycle pattern for the portfolio weight of stocks is flat, except for very young investors.


Life-cycle portfolio choice Cointegration Human capital 

JEL Classification



Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Benzoni L., Collin-Dufresne P., Goldstein R. S. (2007) Portfolio choice over the life-cycle when the stock and labor markets are cointegrated. Journal of Finance 62: 2123–2167CrossRefGoogle Scholar
  2. Bohn H. (1999) Should the social security trust fund hold equities? An intergenerational welfare analysis. Review of Economic Dynamics 2: 666–697CrossRefGoogle Scholar
  3. Brennan M. J., Wang A. W., Xia Y. (2004) Estimation and test of a simple model of intertemporal capital asset pricing. Journal of Finance 59: 1743–1775CrossRefGoogle Scholar
  4. Brennan M. J., Xia Y. (2002) Dynamic asset allocation under inflation. Journal of Finance 57: 1201–1238CrossRefGoogle Scholar
  5. Jong F. (2008a) Pension fund investments and the valuation of liabilities under conditional indexation (2008). Insurance: Mathematics and Economics 42: 1–13CrossRefGoogle Scholar
  6. Jong F. (2008b) Valuation of pension fund liabilities in incomplete markets. Journal of Pension Economics and Finance 7: 277–294CrossRefGoogle Scholar
  7. Geanakoplos J., Zeldes S. P. (2010) Market valuation of accrued social security benefits. In: Lucas D. (Ed.) Measuring and managing federal financial risk. University of Chicago Press, Chicago, pp 213–233Google Scholar
  8. Sangvinatsos A., Wachter J. (2005) Does the failure of the expectations hypothesis matter for long-term investors?. Journal of Finance 60: 179–230CrossRefGoogle Scholar
  9. Binsbergen J. H., Koijen R. S. J. (2010) Predictive regressions: A present-value approach. Journal of Finance 65: 1439–1471CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Department of FinanceTilburg UniversityTilburgThe Netherlands

Personalised recommendations